Leonardo DRS Soars in Q1 2025, But Does Guidance Miss the Mark?
17min read Leonardo DRS, a leading provider of defense electronics and power systems, delivered a standout quarter in Q1 2025, but shares dipped post-earnings as investors weighed whether its guidance matched the hype. Let’s break down the numbers and what they mean for investors.
The Numbers: A Strong Start, But Mixed Signals
Leonardo DRS reported 16% year-over-year revenue growth to $799 million, driven by demand for its ground and naval network computing, tactical radar, and electric power systems. Adjusted EBITDA rose 17% to $82 million, with margins expanding 10 basis points to 10.3%, reflecting operational efficiency. Adjusted net earnings jumped 42% to $38 million, while diluted EPS grew 43% to $0.20. The company’s backlog hit a record $8.61 billion, up 10% YoY, fueled by $1.0 billion in quarterly bookings—a 1.2x book-to-bill ratio—highlighting robust demand.
Segment Performance: A Tale of Two Divisions
The results were uneven across divisions:- Advanced Sensing and Computing (ASC): Generated 18% revenue growth to $511 million, driven by tactical radar and naval programs. However, its adjusted EBITDA margin contracted 130 basis points to 8.2%, due to rising costs in infrared sensing programs.- Integrated Mission Systems (IMS): Delivered 11% revenue growth to $288 million, with adjusted EBITDA surging 38% to $29 million. Margins expanded 260 basis points to 11.1%, benefiting from program execution improvements and contract adjustments.
Why the Stock Dipped Post-Earnings
Despite the strong quarter, shares fell 2.3% as the FY2025 guidance—$3.425–3.525 billion in revenue, $435–455 million in adjusted EBITDA, and $1.02–1.08 in adjusted EPS—mirrored consensus estimates. Investors likely expected higher upside given the record backlog and margin tailwinds.
Key Takeaways for Investors
- Backlog Strength: The $8.61 billion backlog, up 10% YoY, suggests visibility into future revenue. Programs like the Columbia Class submarine and electric power systems are critical to sustaining growth.
- Margin Opportunities: While ASC’s margin pressures are a concern, IMS’s expansion and operational leverage from higher volumes could offset these risks. The company aims to grow FY2025 margins further via production transitions.
- Capital Allocation: The initiation of dividends ($0.09/share) and stock buybacks ($3 million in Q1) signals confidence, but investors will monitor how these balance against R&D and M&A needs.
- Risks: Geopolitical tensions and supply chain disruptions (e.g., tariffs on raw materials) could impact margins. The U.S. government’s continuing resolution, while not yet affecting bookings, remains a wildcard.
Conclusion: A Solid Foundation, but Valuation Matters
Leonardo DRS’s Q1 results underscore its position as a critical supplier to U.S. defense priorities, with strong execution and backlog growth. The $8.6 billion backlog and margin improvements in IMS suggest the company is on track to meet FY2025 targets. However, the post-earnings dip highlights that investors are pricing in high expectations.
The company’s focus on shareholder returns and its alignment with modernization programs (e.g., layered air defense, shipbuilding) are positives. Yet, with shares trading at 15.6x 2025E EPS, valuation is now a key hurdle. Investors should watch for margin expansion acceleration beyond guidance and new program wins to justify further upside. For now, leonardo drs remains a solid play on defense spending, but the market’s skepticism reminds us that execution must keep pace with ambition.
